More than three quarters of US mutual funds will have to replace their chairmen in the next 18 months to avoid falling foul of new regulations designed to stamp out conflicts of interest in the scandal-ridden $7 trillion (â¬5.8 trillion) industry.

dissenting voice

Glassman

The Securities and Exchange Commission estimates that 3,700 funds, or 80%, will be affected, including some of the largest fund management groups in the world. The SEC voted through the controversial rules last week, requiring funds to appoint chairmen who are independent of companies managing funds by a margin of three votes to two. The SEC’s rules also demand that 75% of a fund’s directors or trustees are independent of management. This has been increased from 50%.

The enforced changes are likely to cost the industry tens of millions of dollars, according to senior sources. A mutual fund industry analyst said: “It is not immediately clear how the industry is going to cope with this latest set of rules. Finding the right people to fill such roles is going to be tough. You have to question whether it is worth the hassle. Independent directors are not the way to stamp out market timing.”

The new rules were prompted by the mutual fund trading scandal that has rocked the US market in the past year. About 20 fund companies have been charged with allowing favoured investors to carry out improper trading of their funds to the detriment of ordinary investors. Those involved have paid almost $3bn in fines and restitution.

A spokesman for Fidelity, which has been one of the leading opponents of the rule changes, said: “We will comply fully with the rule, of course, although our opposition to it has been well noted in the past.”

The enactment of the rules represents a defeat for industry leaders, including Edward Johnson, chief executive and chairman of Fidelity Investments, and John Brennan of Vanguard. Both have fought to remain chairmen of their boards but will now have to give up the post although they may continue to serve as trustees. The Fidelity spokesman said: “Johnson will continue to be involved in the day-to-day running of the firm.”

Cynthia Glassman and Paul Atkins, the SEC commissioners who cast a dissenting vote, said they could not endorse an action that, while well-intentioned, would force sweeping change through the industry and raise costs for fund investors.

The five SEC commissioners also ordered funds to provide more information to shareholders about their contracts with investment advisers and how they are approved.

William Donaldson, chairman of the SEC, insisted that independent chairmen were needed to avoid conflicts of interest that are built into the mutual fund system and to protect investors.